The Lowdown from Investment Quorum

October 1st, 2018

Global Markets to 01 October 2018 Highlights Global equity markets have another good week as the third quarter ends. Developed markets outperform developing markets over the period. There has been a noticeable recovery across all global sectors. The Fed’s monetary tightening policy has begun to affect sentiment on the bond markets. The price of Brent […]

Global Markets to 01 October 2018

Highlights

Global equity markets have another good week as the third quarter ends.

Developed markets outperform developing markets over the period.

There has been a noticeable recovery across all global sectors.

The Fed’s monetary tightening policy has begun to affect sentiment on the bond markets.

The price of Brent crude oil continues to rise: some analysts are now predicting prices of US$100 per barrel.

Global equity markets have fared better, but trade war tensions are still affecting overall sentiment.

Market Summary

Global equity markets have performed significantly better, with Wall Street and the technology sector leading the way. Disruptive technologies have driven change across almost all global sectors, no more so than in retail, where the likes of Amazon have completely transformed the high street on both sides of the Atlantic. Furthermore, Amazon has announced that it has made its first investment in a homebuilder start-up that constructs prefabricated custom-single and multi-family homes.

There’s no doubt that throughout the year, the backdrop to investment has been the gradual escalation of hostilities between the US and China and their tit-for-tat tariffs on exports, factors which have affected both markets and investor sentiment regarding asset allocation. As far as markets are concerned, there appears to have been a decoupling of performance between the developed and the developing, with the US stock market emerging as the biggest beneficiary.

However, between June and September, there was a noticeable change in investor sentiment towards the Japanese and Latin American stock markets: the Nikkei 225 and the MSCI Latin American Indices recorded local currency gains of 8% and 4%, respectively.

The Bank of Japan is probably distorting its own domestic market performance with its continued buying plan for Japanese equities: the market looks relatively cheap compared with the US. Furthermore, Japan will be hosting the Rugby World Cup in 2019 and the Olympics in 2020 – hosting such events has a tendency to improve investor sentiment towards a host nation’s stock market.

There have been significant gains over the last quarter in many of the MSCI global sectors, such as healthcare, industrials and – of course – technology, with many companies in this particular sector diversifying into others. In fact, the MSCI has restructured the telecoms sector, creating a new communications services sector for tech giants such as Netflix and Facebook.

The emerging markets have begun to show some signs of life after a period of frustration resulting from trade war fears, uncertainties associated with the Fed monetary tightening policy and political concerns in countries such as Argentina and Brazil. The MSCI has once again said that it is considering increasing the weighting of Chinese equities in its various global benchmarks, possibly even quadrupling the weighting of Chinese large caps and adding mid caps listed on ChiNext, Shenzhen’s start-up board.

Base and precious metals, on the other hand, have fared rather poorly, with only the energy sector continuing to gain momentum: the price of Brent crude oil has continued to rise. Fears of sanctions being imposed on Iran, together with President Trump’s request that OPEC ramp up its production levels in order to prevent further price rises have unsettled the energy market.

Unfortunately, it is unlikely that either OPEC or non-OPEC countries will respond immediately to the president’s request, which could drive oil prices even further upwards.

Unfortunately, the recovery of certain stock markets over the last quarter does not hide the fact that – if you take away the US and the technology sector – this year has been rather disappointing. Indeed, the MSCI World index (ex-US) is down by just under 4%, whereas if you include the US, the index is up by the same amount.

Yet any UK investors who have embraced a higher weighting towards global equities markets have undoubtedly profited from sterling’s continued weakness. Over recent decades, the most common asset allocation mistake that UK investors have made has been to have too little on overseas markets, preferring a “home country bias”. This means that many have missed out on the exceptional growth that other sectors – such as technology and healthcare – have delivered, and they have failed to capitalise on the constant rise of the global consumer. There are obviously greater risks in having a higher weighting towards global equities – such as currency fluctuations. But the rewards can be far greater.

Although investment returns from global equities have already been highly rewarding, it is not true to say that hesitant investors have already missed out. In fact, the future still looks relatively bright. We have already mentioned the disruptive changes sweeping across the world: these are likely to continue for many decades to come, generating further global investment opportunities for all investors.

As far as last week is concerned, the US Federal Reserve Bank has just hiked interest rates by another 25 basis points – the third hike of this year. The Fed has continued to tighten throughout this year as the US economy has strengthened. Fed chairman Jerome Powell has clearly reacted to rising inflation and the strengthening economy – even though Trump has voiced his disapproval of higher rates.

Following this rate rise, the yield on the 10-year Treasury bond rose to 3.11%, before falling back to 3.04%. Unfortunately, the same cannot be said for the Italian government 10-year Bond Yield: it climbed to 3.25% after Rome unveiled plans for a sharp increase in public spending and proposed a 2.4% budget deficit – something which is sure to send the Italian government on a collision course with the European Union. And the Italian stock market suffered its worst day for two years, dropping 3.7% after a selling frenzy took hold of the Milan exchange.

Finally, as we enter the last quarter of 2018, market watchers will be looking for a continuation of the rally that we saw in many of the developing markets throughout the third quarter, while perhaps getting clearer picture of issues such as the trade war and Brexit. As for the US, there will probably be a further interest rate hike in December. But to counterbalance it, we will hopefully see a continuation of those excellent corporate profits that have recently helped to push Wall Street to new all-time highs.

Peter Lowman, Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.

This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.

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